Thursday, October 23, 2008

One of the worst things a businessperson can do is complain about the price of gas. I have lost track of the amount of businesspeople who have complained to me about "wasted gas" when they should have been complaining about wasted time. Just the other day, I had a financial advisor complain to me that he drove 30 minutes each way to meet with a potential client only to find out that the potential client was gone for the day. Rather than complaining about his wasted time, he chose to complain about the money spent on wasted gas.

When complaining about wasting 60 minutes worth of gas, you are reducing the value your time, both perceived and real. By placing the emphasis on the $14-16 worth of gas ($9-12 after taxes), you are essentially saying "my time is worth less than $14-16 per hour." If that is truly the case, then you should not be in business...you should go get a job where you can earn more than $14-16 per hour.

As a businessperson, your time is worth AT LEAST $50 per hour...depending on your profession, your time could be worth as much as $500 per hour. Stop complaining about gas and focus your energy on conserving your time...figure out how to become more efficient in day-to-day tasks, determine what items you can delegate to a staff member, or cut loose some of your unprofitable clients.

But whatever you do, do not devalue your worth by complaining about wasted gas when you should be complaining about wasted time!

Tuesday, August 19, 2008

As a business owner, I rarely discuss politics in most business situations.

However, the upcoming election and how it will impact the future of our tax code is one topic that requires a political discussion...

In the current state of the IRS Tax Code, there exists a unique situation that will provide a great deal of power to the sitting President in 2010. Currently, many areas of the code have built-in "Sunset Provisions" which mean that they are set to expire in 2010. Some areas that will be affected include:

With a democratic president in office come 2010, it is assumed that any current benefits set to expire in 2010 will either remain expired or be brought back on a smaller scale, providing less of a benefit. Similarly, any current taxes that are set to expire or reduce in 2010 will be reinstated and possibly even raised.

With a republican president in office come 2010, the opposite assumption holds true.

Whoever holds office in 2010 will have the unique opportunity to shape the future of the tax code. This is a very strong power that should be weighed heavily by voters when they decide who to pull the lever for in November.

Turn to Virgin founder and Chairman Richard Branson for a simple mnemonic to help you remember the difference, "Pretend you're fishing. Net is all the fish in your net at the end of the year. Gross is that plus everything that got away." This is the advice that was given to him by one of his Virgin boardmembers after he consistently made this mistake early on in his career...he considers it the best financial advice he ever received.

Sunday, August 17, 2008

Accounting is a field filled with many accountants who prepare tax returns “on the side” or have a “side business” in addition to their full-time job. While this presents many problems with communication, audit representation, availability, etc., perhaps the biggest problem is the additional audit risk that the clients who use these types of tax preparers face.

Since many of these accountants are looking to make some extra money without any overhead, they have a tendency to share software with other accountants or steal software from the company they work for. When this happens, you can pretty much count on the fact that the “Paid Preparer’s Information” section of your tax return will either be left blank altogether, have “Unpaid Preparer” checked off, or have “Self-Prepared” checked off.

When any of the above items appear in the Paid Preparer Information section of a tax return, the audit risk of that tax return skyrockets. This is looked at the same as if a CPA prepared a return and does not stand by it enough to feel comfortable signing it.

Although it could be a perfectly innocent case of your tax preparer trying to save a few bucks on tax preparation software, the IRS will not know this until you tell them during your audit!

Additionally, the IRS is currently working on a piece of detection software that will identify quarterly payroll tax returns that are not signed by the preparer. Once in place, this system will be used to identify preparers who have a tendency not to sign their clients’ payroll tax returns and subject these clients to higher-than-normal audit risks.

Friday, August 15, 2008

There has been a lot of hype over the past couple of years surrounding a new piece of legislation that allows a husband and wife who operate a business together to forego filing a Partnership return in favor of filing a Schedule C on their joint tax return.

The argument for this is that the accounting fees will typically be $200-300 less each year and the couple wouldn’t have to go through the hassle of signing & mailing in their tax return.

However, the downside is that audit risk will jump from .3% to 2.7%, leaving your business nine times more likely to be pulled for a random IRS audit!

The best options for any husband and wife business partners would be to establish an S-Corporation or an LLC. The second best option would be to remain a Partnership and continue to file a separate Partnership tax return. The worst option would be to "take advantage" of this legislation and file a Schedule C.

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act into law. This law provides various tax breaks for military personnel and their families. Here is a summary of the key benefits:

Penalty-Free WithdrawalsReservists who get called into active duty will be allowed to withdraw funds from their retirement plans such as IRAs, 401(k)s, and 403(b)s without having to pay the standard 10% penalty. Note, these withdrawals will still be taxed as income, it is only the actual 10% penalty that is being waived.

Tax-Free RolloversMilitary death benefits and military insurance proceeds may be rolled over into ROTH IRAs or Coverdell Education Savings Accounts (ESAs) tax-free without regard to the standard limits/restrictions.

Economic Stimulus PaymentsAs long as one spouse is a member of the military, the couple will qualify to receive an economic stimulus rebate check.

Earned Income CreditNon-taxable combat pay will be treated as earned income when calculating the Earned Income Credit.

Sunday, July 27, 2008

If you are like many business owners out there, you dream of one day selling your business, cashing that one last big check, and riding off into the sunset.

However, gearing up a business to sell is something that should be established and worked at from day one.

Many small business owners approach their business in a way that allows them to avoid paying taxes (not reporting all of your income, inflating your expenses, etc.). Aside from the legal and ethical implications here, you are setting yourself up for great disappointment when it comes time to sell your business.

Here are just some of the things you risk by taking the “I’ll do what I can to avoid taxes now and worry about the sale of my business later” approach:

1) Many years of continued profitability increase the likelihood of a quick sale and ensures that someone will be willing to pay top dollar for your business. Underreporting income and overstating expenses makes your business look less profitable

2) A good buyer will have his accountant run due diligence and look into the history of your business. A history of problems with the IRS means that your business will be less desirable due to the fact that with it may come additional future IRS scrutiny

3) A buyer who sees your tax avoidance as a sign of other possible unethical business practices, they may be less willing to negotiate with you or they may walk away from the deal all together

Monday, July 21, 2008

If so, most tax preparers and unscrupulous accountants may steer you towards the Home Office Deduction. DIY tax preparation software such as TurboTax or TaxCut will also lead you down this road.

However, if you are fortunate enough to have hired a knowledgeable CPA who is ethical and looking to establish a long-term accountant/client relationship with you, you will not be claiming that Home Office Deduction anytime soon.

Claiming this deduction will save you a few hundred dollars on your current tax return. Sounds great, right? Even if claiming this deduction will expose yourself to significantly higher audit risk, you are willing to do it in exchange for those couple hundred dollars.

However, what you haven’t been told up until now is the long-term impact of claiming the home office deduction…how it can cost you up to $15,000 in additional taxes when you eventually sell your house!

Considering that the average homeowner who claims the home office deduction saves approximately $450 in taxes each year, they would have to live in their house for over 33 years to ensure that they have saved enough taxes each year to cover the potential $15,000 tax bill.

How does claiming the home office deduction lead to a high tax bill in the year you sell your house? Well, the IRS allows a $500,000 capital gain exclusion to married couples who file a joint tax return. What this means is that, given certain requirements are met, you can sell your house for a profit of up to $500,000 without having to pay a penny in capital gains taxes. However, if you allocate 20% of your house to your “home office” for purposes of claiming the home office deduction, you run the risk of losing 20% of your capital gain exclusion. Losing 20% of this $500,000 exclusion means that $100,000 of your gain would be taxed at the capital gains rate (currently 15%) and you would be faced with a $15,000 tax bill.

One caveat – renters. If you rent your home instead of owning it, you can claim the home office deduction without having to worry about this long-term negative financial impact. Keep in mind, that your tax returns will still remain subject to additional IRS scrutiny as the home office deduction is an often-challenged deduction.

Monday, July 14, 2008

Ever feel like you are one of the smallest fish in your accountant’s pond?

If so, it may be time for a change.

Being the small fish means that you are last in line to hear about changes in the tax code that could benefit you and your company…it means you receive answers to your questions weeks after you ask them…it means virtually no tax planning is done throughout the year to benefit you come tax time.

The main reason why accountants treat their smaller clients like “small fish” is simply due to the fact that they are not good business people themselves. Tip #1…if your accountant does not run his own business well, why do you have him on board as a trusted advisor for your business?

Let me explain to you why my firm, Merl & Hanley, LLP has made a conscious decision to view our smaller clients as our best clients:

1) Accounting is a service-driven business that revolves around one main thing…time. There are only so many hours in a day…a week…a year. Accountants gauge the success of their practice by their hourly rate. Taking on larger clients that provide us with 10, 15, 20+ hours of billable hours each month typically means having to offer these clients some type of “volume discount.” So, if we are able to earn $150 per hour working on the smaller (1-2 hour per month) client, we can only earn $125-140 per hour working on the larger (20+ hour per month) client. Since hourly rate is the driving force of our business, the smaller client is actually our better client since we are able to earn more per hour working on the smaller client’s file. That is why our smaller clients come first!

2) Accounting, like all other service-driven businesses succeeds due to referrals and satisfied clients are the number one source of referrals. By choosing to service 200 smaller clients for the same amount of fees that we could earn by servicing 50 larger clients, we expand our field of referral sources by 300%. Growing our business through referrals means spending less time on marketing, which means more time to service our existing clients.

About Me

I am a CPA and Certified QuickBooks ProAdvisor who helps small business owners and self-employed individuals minimize audit risk while reducing tax liability.
My book, Effective Tax Planning for the MicroBusiness is available at: 30minutebooks.com